NASD and NYSE Issue Joint Interpretive Guidance on Fixed Income Research
On July 31, 2006, NASD and NYSE issued joint interpretive guidance on fixed income research. In particular, NASD and NYSE described the results of their review of compliance with the Bond Market Association’s "Guiding Principles" on fixed-income research, which were issued in May 2004. The guidance followed a December 2005 joint report by NASD and NYSE on the effectiveness of their research analyst conflicts of interest rules, which apply only to equity research reports. In the December 2005 report, NASD and NYSE indicated that they would monitor member firms’ compliance with the Guiding Principles to determine the necessity of adopting definitive rules relating to fixed-income research.
NASD and NYSE did not state whether or not there would be formal rulemaking in the area of fixed-income research. Rather, the SROs indicated they will continue to monitor the extent to which member firms have adopted and adhered to the Guiding Principles or other supervisory systems regarding fixed-income research conflicts of interest. In the meantime, NASD and NYSE highlighted three areas of its examination results.
Supervision: NASD and NYSE stated that they found instances where member firms did not have effective written supervisory procedures for fixed-income research, citing the SRO supervision rules (e.g. NASD Rule 3010 and NYSE Rule 342) as well as the Guiding Principles. The SROs also stated that, in other cases, member firms had supervisory procedures in place but failed to enforce them.
Disclosures: NASD and NYSE stated that the most prevalent issue that arose from their examination of the Guiding Principles involved the disclosures contained in fixedincome
research reports. In particular, the SROs stated that they found instances in which member firms failed to include the tailored disclosures or all of the relevant disclosures provided for in the Guiding Principles. Additionally, NASD and NYSE stated that member firms should not use boilerplate disclosures in fixed-income research reports if a more detailed disclosure will better inform investors of specific conflicts.
Analyst Certifications: NASD and NYSE stated that their examinations found instances in which member firms failed to comply with the SEC’s Regulation AC, which requires analyst certifications. The SROs noted that Regulation AC applies equally to fixed income and equity research.
View the Joint Interpretive Guidance
Securities Industry FYI is a service of the Broker-Dealer Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact any member of Morgan Lewis’s Broker-Dealer Practice, including:
Washington, D.C.
John V. Ayanian
202.739.5946
jayanian@morganlewis.com
Shauna Sappington
202.739.5573
ssappington@morganlewis.com